The Old Town white coffee company is my research project. As we know the Old Town white coffee company is the largest chain restaurant in Malaysia. The OLDTOWN brand has evolved and crosses over into the food and beverage business in the form of the retail chain of OLDTOWN F&B Outlets (oldtown company, 2011). According to my understanding and observation, finally, I choose Shenzhen (CHINA) to be my target. Because of Shenzhen is very big, positive and potential market. The mode of entry is franchising.
I had a detailed analysis for current situation of Old Town. This assignment can be consisted of five parts: the background of Old Town White Coffee Company, proposed business expansion, business environment analysis, mode of entry and Justification on Business Expansion.
From this assignment, people can know that what are government policies will support foreign company to do business in Shenzhen, how about Shenzhen’s economic and cultural. Besides, I will present the advantages and disadvantages of the mode of entry – franchising.
Background of Old Town White Coffee Company
The Old Town white coffee company’s history can be traced back to the incorporation of white cafe in 1999, with the intention to provide quality white coffee to Malaysian households and the food services industry, the co-founders and Executive Directors, Mr. Goh CHINGMun and Mr. Tan SayYap formulated their own blend of 3-in-1 instant white coffee and commenced manufacturing in 1999 (oldtown company, 2011).
The current Malaysia competitors are Coffee Bean& Tea Leaf, Dome café, Gloria jeans Coffees. Get better grades Old Town White Coffee Company Leveraging on its success in the Malaysian and Singaporean markets has done the preliminary screening and in-depth analyses considering a myriad of factors to accurately identify a destination for its initial international market entry. Since the opening of their first ‘Old Town White coffee’ café outlet in Ipoh in 2005, their chain of cafe outlets have expanded to reach 137 cafe outlets in Malaysia and Singapore as at 31 October 2009.
They successfully commercialized their instant 3-in-1 coffee mix under the ‘OLDTOWN’ brand name for the retail sector in 1999. As at 31 October 2009, ‘Old Town’ 3-in-1 instant coffee mix was sold in approximately 1348 retail outlets nationwide in Malaysia, approximately 550 retail outlets in Singapore and approximately 2100 retail outlets in Hong Kong(oldtown company, 2011).
Proposed Business Expansion
Shenzhen (China) was chosen to be the target market to expand. Established in 1979, Shenzhen is located in the southern part of Guangdong Province, on the eastern shore of the Pearl River Delta and just north of Hong Kong. The Shenzhen Special Economic Zone approved and established by the State Council in 1980 is one part of Shenzhen City. The total area of Shenzhen is 1948.69 km2, while the Special Economic Zone is 391.71km2. During the past 30 years after its establishment, the development of national economy of Shenzhen City was very fast, a great success has been made and focused by the whole world (Shenzhen Government Online, 2011).
Shenzhen is an ecological garden city, with half the total area within a demarcation line for nature protection where construction is banned. The urban greenbelt coverage in developed areas is 45.3 percent, with a per capita green area of 16.3 square meters. In recent years, it has won prestigious honors, including Nations in Bloom, UNEP’s Global Top 500 Laureate Roll of Honor, National Garden City, National Civil City and a special gold prize for ozone protection, from international organizations and the Chinese Government (Shenzhen Government Online, 2011).
The reasons why I choose Shenzhen that are: Shenzhen is fourth on the Chinese mainland in terms of economic power and one of the cities that has generated the biggest economic returns. Located at the forefront of Pearl River Delta, Shenzhen is connected to New Territory of Hong Kong in the south, and is near Daya Bay in the east, and reaches Pearl River Mouth in the west, and is near Dongguan and Huizhou in the north. It is an important coastal traffic hub in South China, and it has 12 ports, for easy access to Shenzhen, and is the only city in China which has marine, land and air ports. Shenzhen Port adopts 24-hour clearance and electronic inspection, and the commencement of the Western Bridge will connect Shenzhen and Hong Kong more closely, and the regional advantages of Shenzhen will be strengthened, which will not only further develop the economy in Shenzhen and Hong Kong, but also will be the hub and bridge for Hong Kong to connect the Mainland of China and the world (Shenzhen Government Online, 2011).
4.0 Business Environment Analysis
The government encourages overseas capitals to invest the Shenzhen’s every area.
For foreign-invested enterprises, corporate income tax rate is decreased from the original 30% down to the present 15%, while the local income tax levied at the rate of 3% is exempted. Foreign-invested manufacturing enterprises can enjoy 2 years of corporate income tax exemption and half reduction for the ensuing 3 years according to the regulations of the tax law (Shenzhen Government Online, 2011). So, this policy will help us to reduce our cost and as possible as gain more benefits.
Free Trade Free Areas
Shenzhen Futian, Shatoujiao and Yantian Port Bonded Areas are economic areas established after the approval of the State Council and supervised by the customs, to which special policies apply. Bonded areas have the functions of warehousing, logistics, production, and processing, international trade and commodity exhibition. Located in Shenzhen Futian Central District, Futian Bonded Area covers 1.35 square kilometers. Special passage directly leading to Hong Kong has been built. It focuses on developing hi-tech industries, modern logistics industry and international trade (Shenzhen Government Online, 2011).
Because of these policies, we can get more benefits, such as import tariffs on some raw materials can reduce. Besides that, Shenzhen’s sea transportation is also more convenient to enable us to purchase a variety of our needs. In the economic areas, not only the market has great potential, but also government will provide many policies to support our business.
A famous Chinese saying is: “You think you’re brave until you go to Manchuria, you think you’re well-read until you reach Beijing, and you think you’re rich until you set foot in Shenzhen (StartInChina.com, 2010).”
Shenzhen has as only one of three Chinese cities (Shanghai and Hong Kong are the other two) their own stock exchange called the Shenzhen Stock Exchange. This exchange was founded in 1990. Shenzhen harbor rivals that of Shanghai and Hong Kong measured by export of Chinese goods. In 2005 Shenzhen was the fourth busiest harbor in the world measured by the number of containers and was growing much faster than Hong Kong (StartInChina.com, 2010).
In 2008 Shenzhen was selected as the most innovative city in China, before Hong Kong and Shanghai. Shenzhen holds the edge over Hong Kong in technological innovation and cultural and environmental aspects, according to the study. Shenzhen was 4th in investment environment (after HK, Beijing and Shanghai) (StartInChina.com, 2010).
Half October 2008, the expansion of the current High-Tech park in Shenzhen officially started. The 3 billion yuan (US$439 million) software base, which covers 150,000 square meters and will be funded by the Shenzhen government, will be put into operation in 2010. Shenzhen built a software park in the high-tech park 10 year ago. It is home to more than 400 companies with 40,000 employees. The output of the city’s software industry reached 86 billion yuan in 2007, accounting for 15 percent of the country’s total. Software exports reached US$4.5 billion last year (StartInChina.com, 2010).
Shenzhen is home to some of China’s most successful quality brand high-tech companies, such as BYD, Dingoo, G’Five, etc. China’s biggest and largest search engine plans to build its international headquarters in Shenzhen. A number of foreign IT companies also have facilities in the city. Shenzhen Convention & Exhibition Center is a super large public construction with multi-functions of hosting business activities, celebrations, conferences, conventions, entertainment events, exhibitions, restaurants and all kinds of shows. In 2009, Shenzhen’s economy maintained a healthy momentum of development. GDP grew by 10.7 percent to 820.123 billion yuan, and the total retail sales of consumer goods increased by 15.4 percent to 259.868 billion yuan. Due to the global economic crisis, Shenzhen’s foreign trade volume dropped 10.4 percent compared with the previous year to US$270.155 billion, but still ranked first among the nation’s large and medium-sized cities. Shenzhen is fourth on the Chinese mainland in terms of economic power and one of the cities that has generated the biggest economic returns. Its per capita GDP grew to 92,771 yuan in 2009 from 606 yuan in 1979, topping the country (Shenzhen Government Online, 2011).
The economy is great strong in Shenzhen. Shenzhen people’s incomes also are very high. They have strong purchasing power and consuming ability. It’s good to business here and easily to success.
Shenzhen has just over a modern 30 year history so the city is filled with people from all parts of China and around the globe. Shenzhen culture is not home grown and traditional. It is a diverse mix and a refreshing change compared to many cities worldwide. Coffee culture in China is more a symbol of lifestyle than anything else. It represents the young, hip, emerging middle class with money to burn. Most of these young coffee drinkers are more open-minded to Western influences that have made their way into China and are eager to show it through coffee consumption. To simplify, tea is for the traditional and coffee is for the connoisseur (New Shenzhen Business.com, 2010).
As a result, whenever Chinese visit coffee houses they expect to be pampered with an experience of relaxation and comfort. They don’t want a coffee production line, they prefer the coffee experience and companies like Starbucks have given that to them by providing a uniquely different atmosphere with comfortable couches. In America most people want a coffee to go, but in China they like to sit down and talk with their friends (New Shenzhen Business.com, 2010).
According to International Coffee Organization, it is estimated that China’s coffee consumption will grow by about 15 percent per year, far above the global average of 2 percent. However, most of this growth is based on China’s unique coffee culture, representing a fashionable symbol rather than habitual usage (New Shenzhen Business.com, 2010).
Now days, There are many white-collar workers in Shenzhen, Coffee has already been the young people and white- collar workers’ the essential thing in their life. So, we will be able to be successful in the background of Shenzhen.
Mode of Entry
I chose the best mode of entry that is franchising. Franchising is the perfect way to start a business because it gives you the freedom of operating your own company with years of support and proven success of a well-known brand behind you. OLDTOWN has consistently maintained our position as a leader in the industry and equips our franchisees with the right tools for success. We work for, and with, our franchisees to develop a successful customer base and a plan for growth. Unlike independent business start-ups, OLDTOWN franchisees partner with a brand people know and trust, receive good training and support (Ward, 2007).
Franchising is one of the popular business expansion systems in the world today. It has been around since ancient history but has only recently made its debut in the world market. My business is based on a proven idea. I can check how successful other franchises are before committing me. I can sue a recognized brand name and trademarks. I benefit from any advertising or promotion by the owner of the franchise. Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation. Besides, the relationships with suppliers have already been established (Ward, 2007).
Also, franchising has some risks. Besides the original franchise fee, royalties, a percentage of your franchise’s business revenue, will need to be paid to the franchisor each month. The franchisor may also charge additional fees for services provided, such as the cost of advertising. Sometimes, Name recognition is widely seen as one of the major benefits of franchise ownership. However, name recognition can also be a hindrance to our business, particularly if the other franchises or the franchising company itself is receiving bad press or suffering from a poor public perception (Ward, 2007). For example, my franchised OLDTOWN can be the best coffee in Shenzhen, but still suffer because another franchised operation is doing a poor taste. Our best protection against this is to make sure our franchisor has a time-tested and solid reputation within the industry. So far, OLDTOWN Company’s performance is pretty good.
Justification on Business Expansion
Government provides some positive policies to do business in Shenzhen, and because of Shenzhen is special economy zone, there are a number of specific policy support to the people who come from everywhere of the world to start business here. Such as reduce the tax, 2 years of corporate income tax exemption and half reduction for the ensuing 3 years.
There is no doubt that Shenzhen is a huge potential market. Shenzhen is fourth on the Chinese mainland in terms of economic power and one of the cities that has generated the biggest economic returns. Shenzhen has a strong economy. People’s incomes also are very high. They have strong purchasing power and consuming ability. Besides that, Shenzhen culture is not home grown and traditional. It is a diverse mix and a refreshing change. Coffee has already been the young people and white- collar workers’ the essential thing in their life, a lot of people love coffee in Shenzhen.
I chose the mode of entry that is franchising. Franchising is the perfect way to start a business because it gives you the freedom of operating your own company with years of support and proven success of a well-known brand behind you. Franchising offers a shortcut to growth, we receive a ready-made business. OLDTOWN Company has access to proven business methods, training, and an established reputation- all of which may help minimize the financial risk.
In conclusion, the Old Town white coffee company is the largest chain restaurant in Malaysia. My goal is that make decision to how OLDTOWN WHITE COFFEE Company expanse to Shenzhen (CHINA). I analysis some factors of Shenzhen’s situation, including political, economic, and cultural. And I chose the best mode of entry that is franchising.
According to my findings, I have explained why the business expansion is viable. Shenzhen is very big, positive and potential market; People have strong purchasing power and consuming ability. I have confidence to face challenges, and overcome those to get success.
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